Thursday, 5 August 2010

In the book Why Smart People Make Big Money Mistakes by Gary Belsky and Thomas Gilovich, the authors note an interesting quirk - when people receive "bonus" money, they are prone to spend it right away, while "rebate" money gets saved. Another book, Nudge, written by Richard Thaler and Cass Sunstein, recommends that governments exploit such thinking processes to influence people in the right direction (which in itself can be debated, though they follow a reasonable principle that the person him/herself would need to be in agreement that they are being nudged in a way that they themselves think beneficial).

Enter the Tax Free Savings Account (TFSA), introduced by the federal government in January 2009. Its purpose is to encourage people to save. Sounds reasonable for people to save before spending, rather than the reverse. So, I wondered whether the feds got the idea for the name with the intention to virtuously manipulate our behaviour. I asked the Department of Finance and this is what they said: "The name – Tax Free Savings Account – was considered to best represent the nature and benefits of this account ..." i.e. no nudging happened here, just routine, bureaucratic, mundane, literal, factual thinking. To put it in terms of a previous management trend, they were thinking fully inside the box. Or, that's what they are willing to admit, because though they considered other name options, they wouldn't tell me what they were. Governments routinely and deliberately mislead us (in our own best interest, so it is said) but cannot admit to doing so. Guess we'll have to guess whether this was a case of Nudge or Nudge Nudge Wink Wink.

The TFSA has enjoyed rapid uptake. Perhaps some of it has to do with the name itself? First, the word "free" is a sure-fire consumer salivation-inducing tool that works no matter how much it is misused and abused in advertising. Second, savings is a good trigger-word to induce people to put money in and to keep it in. Imagine if they had called it the Tax Free Spending Account.

It would be useful for the feds to track withdrawal rates to see if they stay low, and perhaps to do surveys to ask people what they used the money for when they did withdraw it. If the program works, we should expect to see people withdraw little for luxury consumer spending (the new plasma TV, a holiday trip) and more for things with long term value (house, education).